What’s happening in the mortgage market?

” What’s happening in the mortgage market ” is something we’re being asked a lot at Enness.

Despite the tax changes and upcoming EU referendum driving uncertainty in the economy, lending figures through the start of Q2 have been unaffected. The UK market continues to see strong domestic demand, compared to relatively weak world growth. With the labour market exhibiting the highest employment figures in 45 years, that’s unlikely to fall anytime soon.

Even with the looming spectre of Brexit, March lending figures were up 60% on last year – evidence of the number of purchase chains sped up to avoid the extra costs. This suggests Q2 is likely to be slower to balance those transactions brought forward. Despite the second home stamp duty changes at the beginning of April, lending through the month is still up a huge 16% on last year – far from the expected easing off, following spiking figures in March.

The Monetary Policy Committee (MPC) recently voted to keep interest rates at 0.5% with a view to starting the oft-predicted increase much later than expected, possibly now not until 2020.

Housing market

As house prices remains strong and continue to outperform wage growth, a number of people are still being priced out of the market, suggesting growth is likely to slow. Where we’ve seen inflation to be quite regional, it’s likely the slowdown will be more evident in those previously higher-performing areas. At the moment prices are continuing to rise as supply is still unable to keep up with demand – likely due to the falling number of properties coming onto the market, as the stamp duty changes has made keeping hold of property more efficient.

Policy changes

Reduced tax relief for private landlords effective from next year is now filtering into current buy to let mortgage criteria. A number of lenders are increasing their stress tests on rental income, blocking consumers from tapping into the market, along with limiting what’s available to current landlords. Going forward we could see a number of outcomes; higher tax bills could make owning buy to let properties less profitable, meaning more come onto the market and we see prices start to level out. If not, landlords may try to pass on the higher costs, increasing their rents, mainly in London. What we’re seeing already is the move from buying in a personal name to a company, which can be more efficient from a tax-planning perspective.

A few lenders have started re-introducing no deposit, or 100% mortgages. Whilst this sounds like a possible entry point for borrowers without initial funds, these will still require some form of extra security, either in the form of a deposit on account from a relative, or a guarantor.

Certain high street lenders’ latest policy change is an increase in maximum age at the end of the mortgage term. This has prompted a number of clients who previously thought lending wasn’t possible to enquire. What’s important to note here is that even though some lenders can now go to age 85, the mortgage must still be affordable past retirement age. Pension income must still be able to support the loan after the employment income is assumed to stop or deemed not viable.

EU referendum

With the EU referendum looming, uncertainty and speculation is affecting the housing market. As always with a major policy or political decision, you’ll have those who are able to exploit the market and gain from it, those who attempt to but end up losing, and those with less risk appetite who decide to wait it out. With polls showing a fairly even spread, it is a tough one to predict.

Stay – If the vote is to stay, economic fundamentals should remain stable and continue on a path similar to Q4 of 2015. The housing market should continue to perform as it was with London remaining at the forefront of growth, as it regains its status as a safe asset for foreign investors. Those market participants who were holding off in the lead up should provide a slight boost in performance.

Leave – If the vote is to leave, the outcome will depend on how long negotiations take, along with the performance outlook over that time. The practicalities of a separation may take years to implement which could leave the market in a limbo state. Foreign investors are likely to continue to hold off to see how the UK performs on its own. Those market participants who were waiting for the outcome may continue to stall until the picture is clearer. Prices will depend on how supply is affected by falling foreign investment and continuing domestic demand. Will homes continue to be built at the current rate? Potentially the greatest impact here will be on the London market. With just under 50% of central London investors being foreign, we’d expect prices to flatten in the short-to-medium term. On the other hand, if sterling plummets dramatically, the UK market will become far cheaper for foreign investors, making it a more attractive prospect – although investors will have to weigh this against London’s potential loss of status and as a politically stable economic hub. How interest rate increases are handled may also be slightly different to if we were to leave.

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